Gas price analysis and supply-demand curves for local delivery service expansion

Gasoline, similar to any other commodity in the marketplace, is influenced by the forces of demand and supply. In turn, this impacts the quantity amount of the commodity that is demanded and supplied to the consumers. The following discussion will encompass the gas prices of gasoline per gallon in ten different gas stations. Thereafter, the theory of demand and supply will be utilized to ascertain the change in prices and the new prices to be set in a new market.

The following are 10 gas stations in your local area with a record of the price per gallon for each gas station.

Gas Station

Price per Gallon

Catt-Rez Enterprises Inc. 10910 Erie Rd & Lakeshore Rd

Big Indian Smoke Shop 597 Milestrip Rd near Farnham Rd

Wolf's Run 12795 Four Mile Level Rd near Iroquois Dr.

Signals 11024 Southwestern Blvd near Brant Farnham Rd

Heron's Landing 11186 Southwestern Blvd near Railroad Ave

Native Pride II 11403 Erie Rd & Milestrip Rd

1.95

Rez Smoke Shop 986 Bloomingdale Rd near New Rd

2.05

Mobil 718 11th Ave & W. 51st St.

4.19

CITGO 1320 Hutchinson River Pkwy N. near Balcom Ave

3.79

i. Create a supply curve for gasoline

Gas Station

Price per Gallon

Supply

Catt-Rez Enterprises Inc. 10910 Erie Rd & Lakeshore Rd

1.77

50

Big Indian Smoke Shop 597 Milestrip Rd near Farnham Rd

1.82

60

Wolf's Run 12795 Four Mile Level Rd near Iroquois Dr.

1.85

70

Signals 11024 Southwestern Blvd near Brant Farnham Rd

1.89

80

Heron's Landing 11186 Southwestern Blvd near Railroad Ave

1.89

80

Native Pride II 11403 Erie Rd & Milestrip Rd

1.95

90

Rez Smoke Shop 986 Bloomingdale Rd near New Rd

2.05

Mobil 718 11th Ave & W. 51st St.

4.19

CITGO 1320 Hutchinson River Pkwy N. near Balcom Ave

3.79

ii. Create a demand curve for gasoline

Gas Station

Price per Gallon

Demand

Catt-Rez Enterprises Inc. 10910 Erie Rd & Lakeshore Rd

1.77

Big Indian Smoke Shop 597 Milestrip Rd near Farnham Rd

1.82

Wolf's Run 12795 Four Mile Level Rd near Iroquois Dr.

1.85

Signals 11024 Southwestern Blvd near Brant Farnham Rd

1.89

90

Heron's Landing 11186 Southwestern Blvd near Railroad Ave

1.89

90

Native Pride II 11403 Erie Rd & Milestrip Rd

1.95

80

Rez Smoke Shop 986 Bloomingdale Rd near New Rd

2.05

70

Mobil 718 11th Ave & W. 51st St.

4.19

50

CITGO 1320 Hutchinson River Pkwy N. near Balcom Ave

3.79

60

iii. Calculate the average cost of gas in your local area

The average cost of gas in the local area is obtained as follows:

(1.77 + 1.82 + 1.85 + 1.89 + 1.89 + 1.95 + 2.05 + 4.19 + 3.79) / 10

= 21.2 / 10

= $2.12

iv. Calculate the standard deviation

Gas Station

Price per Gallon

Mean difference

Mean Difference squared

Catt-Rez Enterprises Inc. 10910 Erie Rd & Lakeshore Rd

1.77

-19.43

3.1329

Big Indian Smoke Shop 597 Milestrip Rd near Farnham Rd

1.82

-19.38

3.3124

Wolf's Run 12795 Four Mile Level Rd near Iroquois Dr.

1.85

-19.35

3.4225

Signals 11024 Southwestern Blvd near Brant Farnham Rd

1.89

-19.31

3.5721

Heron's Landing 11186 Southwestern Blvd near Railroad Ave

1.89

-19.31

3.5721

Native Pride II 11403 Erie Rd & Milestrip Rd

1.95

-19.25

3.8025

Rez Smoke Shop 986 Bloomingdale Rd near New Rd

2.05

-19.15

4.2025

Mobil 718 11th Ave & W. 51st St.

4.19

-17.01

17.5561

CITGO 1320 Hutchinson River Pkwy N. near Balcom Ave

3.79

-17.41

14.3641

56.9372

7.545674

Therefore, the standard deviation is 7.55.

The theory of demand and supply enables us to understand the determination of prices and quantities in different markets. Demand refers to the quantity of a commodity that consumers are willing and able to purchase at any given price over a given period of time. The law of demand asserts that ceteris paribus the lower the price of a commodity, the greater the quantity demanded by the individual and vice versa. The inverse relationship between price and quantity is reflected in the negative slope of the demand curve as indicated above. An increase in the price of the commodity gives rise to the decrease in the level of demand. This can be perceived in the prices of gasoline in the 10 different gas stations. For instance, as the price increases from $1.82 to $1.89, then the amount of demand declines from 105 to 90. On the other hand, as the price per gallon for gasoline declines from $2.05 to $1.95, the amount or quantity demanded increases from 70 to 80 (Arnold, 2010).

On the other hand, supply refers to the quantity of a given commodity that a producer is willing and able to sell at a given price over a specific time period. The supply curve demonstrates the relationship between market prices and the quantities that suppliers are prepared to offer for sale. In accordance to the law of supply, a greater quantity will be supplied at a higher price than at a lower price. A movement along the supply curve occurs when the quantity changes because of a change in price. An increase in the price of the commodity gives rise to an increase in the quantity supplied. This can be perceived in the prices of gasoline in the 10 different gas stations. For instance, as the price increases from $1.82 to $1.89, then the amount of demand increases from 60 to 80. On the other hand, as the price per gallon for gasoline declines from $2.05 to $1.95, the amount or quantity supplied decreases from 100 to 90 (Arnold, 2010).

Determine whether the prices in your local area are higher or lower than the national average

The national average gas price in the United States is $2.285. Taking this into consideration, eight of the ten gas stations in the local area have gas prices that are lower than the national average. The other two are higher than the national average.

Explain elasticity of supply and demand and how this relates to your pricing decision

The elasticity of demand is a measure of the extent to which the demand of a good responds to changes in one of the influencing factors. Price elasticity of demand refers to a measure of the degree of responsiveness of the quantity demanded of a commodity to changes in its own price. It can be measured using the following formula:

ED = Percentage or Proportionate Change in Quantity Demanded / Percentage or Proportionate Change in Price

For instance, at Wolf's Run 12795 Four Mile Level Rd near Iroquois Dr. gas station, the price per gallon is $1.85. The quantity of demand is 100. On the other hand, at Signals 11024 Southwestern Blvd near Brant Farnham Rd, the price per gallon is $1.85 and the quantity of demand is 90. The elasticity of demand can be calculated as follows:

= [(1.89 -- 1.85) / (90 -- 100)] x (1.85/100)

= (0.04 / - 10) x 0.0185

= -0.000074

Taking into consideration that the ratio is less than one, the quantity demanded is inelastic. In this case, since elasticity of demand is inelastic, it implies that the quantity demanded changes less than proportionately in response to a given change in price (Gans et al., 2011).

In contrast, the elasticity of supply is a measure of the extent to which the supply of a good responds to changes in one of the influencing factors. Price elasticity of supply is a measure of the degree of responsiveness of the quantity supplied to a change in the good's own price (Gans et al., 2011). Price elasticity of supply is obtained using the following formula:

Price elasticity of supply = Percentage change in quantity supplied / percentage change in price

For instance, at Wolf's Run 12795 Four Mile Level Rd near Iroquois Dr. gas station, the price per gallon is $1.85. The quantity of supply is 70. On the other hand, at Signals 11024 Southwestern Blvd near Brant Farnham Rd, the price per gallon is $1.85 and the quantity of demand is 80. The elasticity of supply can be calculated as follows:

In this case, it will be calculated as follows:

= [(1.89 -- 1.85) / (80 -- 70)] x (1.85/70)

= (0.04 / 10) x 0.0264

= 0.0001056

Taking into consideration that the ratio is less than one, the quantity supplied is inelastic. In this case, since elasticity of supply is inelastic, it implies that the quantity supplied changes less than proportionately in response to a given change in price (Gans et al., 2011).

Determine if your prices will be higher, lower, or the same for the new location

Taking into consideration the expansion of the delivery service into another market, I may need to set different prices in the new market, simply because the cost of gas might be much different. Bearing in mind the trend of the data prices indicated above, the prices per gallon that will be set in the new market will be higher than the prevailing ones. This is because the current costs are lower than the national average price per gallon for gasoline. The implication for this is that the new markets will have prices that are greater than the prevailing ones.

References

Arnold, R. A. (2010). Micoreconomics. Ohio: South Western Cengage.

Gans, J., King, S., & Mankiw, N. G. (2011). Principles of microeconomics. Cengage Learning.